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Influence of Book-to-Market Ratio on the Share Price of Listed Companies in Nigeria

Abstract

The book-to-market ratio is an important market-based accounting indicator that compares a company's book value of equity with its market value of equity. It provides useful information about the relationship between the accounting value of shareholders' equity and the value assigned to the company by investors in the capital market. A relatively high book-to-market ratio may indicate that a company's market value is low relative to its accounting net assets, potentially suggesting undervaluation or weaker investor expectations concerning future growth. Conversely, a low book-to-market ratio may indicate that investors assign a relatively high market value to the company's net assets, potentially reflecting strong growth opportunities, profitability, intangible resources, competitive advantages, or favourable investor expectations. Share price represents the market price at which a company's shares are traded and reflects investors' assessments of its current and expected future financial performance, risk, growth prospects, and earnings capacity. In Nigeria, listed companies operate in an economic environment characterized by inflation, exchange rate volatility, changing interest rates, economic uncertainty, rising operating costs, and fluctuations in investor sentiment. These conditions may influence both the accounting value and market valuation of listed companies, thereby affecting their book-to-market ratios and share prices. The relevance of book-to-market information is therefore important to investors, financial analysts, corporate managers, accountants, and regulators in assessing investment opportunities and market valuation. Regulatory institutions such as the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), and the Nigerian Exchange Group (NGX) promote transparent financial reporting and disclosure practices that enable investors to assess listed companies and make informed investment decisions. Despite these regulatory efforts, substantial differences exist in book-to-market ratios and share price performance among listed companies, raising questions about the extent to which book-to-market ratio influences share price. Although previous studies have examined accounting information, market valuation, and book-to-market effects, empirical evidence regarding the influence of book-to-market ratio on the share price of listed companies in Nigeria remains limited and inconclusive. Against this background, this study investigates the influence of book-to-market ratio on the share price of listed companies in Nigeria. The study is anchored on the Ohlson Valuation Model, Efficient Market Hypothesis (EMH), and Signaling Theory. The Ohlson Valuation Model establishes a theoretical relationship between accounting information, particularly book value and earnings, and the market value of equity, thereby providing a basis for examining the relevance of book value information to share valuation. The Efficient Market Hypothesis suggests that publicly available financial information is incorporated into security prices as investors evaluate available information about listed companies. Signaling Theory suggests that the relationship between a company's book value and market value may provide information about investors' perceptions of its financial strength, growth opportunities, risk, and future prospects. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between book-to-market ratio and share price of listed companies in Nigeria. The study adopts a quantitative research design using a structured questionnaire administered to chief executive officers, chief financial officers, finance managers, accountants, financial controllers, investment analysts, portfolio managers, fund managers, stockbrokers, institutional investors, internal auditors, external auditors, and other professionals involved in financial reporting, investment analysis, and corporate valuation within selected listed companies in Nigeria. A stratified random sampling technique will be employed to ensure adequate representation of companies operating in the financial services, manufacturing, consumer goods, industrial goods, oil and gas, telecommunications, agriculture, healthcare, and other sectors listed on the Nigerian Exchange Group (NGX). Book-to-market ratio will be measured using book value of equity relative to market value of equity, changes in the book-to-market ratio, consistency of the ratio, book value per share relative to market price per share, and the relationship between accounting and market valuation, while share price will be measured using market price per share, annual share price appreciation, share price growth, market-adjusted share price performance, and share price volatility. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding book-to-market ratio and share price. Structural Equation Modeling (SEM) will be employed to examine the influence of book-to-market ratio on share price. The measurement model will be evaluated using Cronbach's Alpha, Composite Reliability (CR), Average Variance Extracted (AVE), and Confirmatory Factor Analysis (CFA) to establish the reliability and validity of the research instrument. Additional diagnostic tests, including multicollinearity assessment, common method bias, and model fit indices such as the Comparative Fit Index (CFI), Tucker-Lewis Index (TLI), Root Mean Square Error of Approximation (RMSEA), and Standardized Root Mean Square Residual (SRMR), will be conducted to ensure the adequacy, consistency, reliability, and robustness of the structural model. The study anticipates that book-to-market ratio will have a significant influence on the share price of listed companies in Nigeria. A relatively high book-to-market ratio may provide information about the relationship between a company's accounting net assets and its market valuation and may be interpreted by investors as an indication of potential undervaluation or weaker market expectations. Conversely, a relatively low book-to-market ratio may indicate that investors assign a premium to the company's shares because of strong growth prospects, profitability, intangible assets, competitive advantages, or expectations of future earnings. Changes in the book-to-market ratio may therefore influence investor perceptions and share price movements. Investors may use the ratio alongside earnings, cash flows, dividends, profitability, risk, and growth prospects when evaluating the attractiveness of a company's shares. However, the relationship between book-to-market ratio and share price may not always be straightforward because accounting book value may not fully capture intangible assets, brand value, intellectual property, human capital, and future growth opportunities. In addition, inflation, changes in asset values, accounting policies, and market sentiment may create differences between book value and market value. Consequently, the influence of book-to-market ratio on share price is expected to depend on the quality of financial reporting, investor expectations, industry characteristics, economic conditions, and the company's future growth prospects. This study is expected to make significant theoretical and empirical contributions to the literature on financial accounting, accounting information relevance, investment analysis, corporate valuation, and capital market research by providing comprehensive evidence on the relationship between book-to-market ratio and share price of listed companies in Nigeria. Unlike previous studies that broadly examined book value, accounting information, or market valuation, this research specifically evaluates the book-to-market ratio as a determinant of share price using primary data and Structural Equation Modeling (SEM). The findings will provide valuable insights for listed companies, accountants, auditors, investment analysts, portfolio managers, fund managers, investors, stockbrokers, the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), the Nigerian Exchange Group (NGX), professional accounting bodies, policymakers, regulators, and academic researchers regarding the relevance of book-to-market information in investment decisions and share valuation. The study will also provide evidence-based recommendations for improving financial reporting quality, strengthening disclosure of shareholders' equity, enhancing investor communication, improving the relevance of accounting information, and providing reliable financial information to support informed investment decisions and efficient share price valuation in the Nigerian capital market.

Keywords: Book-to-market ratio, share price, listed companies, book value, market value, accounting information, equity valuation, investor expectations, capital market, Structural Equation Modeling (SEM), Nigeria.